674 Part V: Index Options and Futures 
FUTURES OPTION TRADING STRATEGIES 
The strategies described here are those that are unique to futures option trading. 
Although there may be some general relationships to stock and index option strate­
gies, for the most part these strategies apply only to futures options. It will also be 
shown - in the backspread and ratio spread examples - that one can compute the 
profitability of an option spread in the same manner, no matter what the underlying 
instrument is (stocks, futures, etc.) by breaking everything down into "points" and not 
"dollars." 
Before getting into specific strategies, it might prove useful to observe some 
relationships about futures options and their price relationships to each other and to 
the futures contract itself. Carrying cost and dividends are built into the price of stock 
and index options, because the underlying instrument pays dividends and one has to 
pay cash to buy or sell the stock. Such is not the case with futures. The "investment" 
required to buy a futures contract is not initially a cash outlay. Note that the cost of 
carry associated with futures generally refers to the carrying cost of owning the cash 
commodity itself. That carrying cost has no bearing on the price of a futures option 
other than to determine the futures price itself. Moreover, the future has no divi­
dends or similar payout. This is even true for something like U.S. Treasury bond 
options, because the interest rate payout of the cash bond is built into the futures 
price; thus, the option, which is based on the futures price and not directly on the 
cash price, does not have to allow for carry, since the future itself has no initial car­
rying costs associated with it. 
Simplistically, it can be stated that: 
Futures Call = Futures Put + Futures Price - Strike Price 
Example: April crude oil futures closed at 18.74 ($18.74 per barrel). The following 
prices exist: 
Strike April Call April Put Put + Futures 
Price Price Price - Strike 
17 1.80 0.06 1.80 
18 0.96 0.22 0.96 
19 0.35 0.61 \ 0.35 
20 0.10 1.36 0.10 
Note that, at every strike, the above formula is true (Call = Put + Futures -
Strike). These are not theoretical prices; they were taken from actual settlement 
prices on a particular trading day.